U.S. and EU Sanctions on Iran and Russia for Le Cercle De La Compliance Beth Peters Lourdes Catrain Andrew Keller Aline Doussin

U.S. and EU Sanctions on Iran and Russia For Le Cercle De la Compliance Beth Peters Lourdes Catrain Andrew Keller Aline Doussin

May 31, 2018 Agenda • U.S. Sanctions Programs – U.S. Sanctions: Considerations and Overview – Iran – Russia/Ukraine/Crimea

• EU Sanctions Programs – Iran – Russia

Hogan Lovells | 2

U.S. Sanctions: Considerations and Overview

• Legal Scope of Restrictions – Territorial – Conduct/Sector (e.g. Debt/Equity, Industry) – Targeted Persons (e.g. Specially Designated Nationals, Entity List) • Requesting Clarity or Authorization from the USG under Primary or Secondary Sanctions • Contractual commitments regarding U.S. sanctions (e.g. Banks, Suppliers) • Penalties for Violations: Primary versus Secondary • Enforcement Trends (e.g. Countries, SDNs, Intersection of Export Controls)

Hogan Lovells | 3 U.S. Sanctions on Iran Overview of JCPOA Sanctions Relief • Implementation of Joint Comprehensive Plan of Action (JCPOA) on January 16, 2016 – Most EU trade restrictions with Iran were lifted – Most U.S. “secondary sanctions” were lifted – “Primary” U.S. sanctions remain fully in place, meaning that broad U.S. trade embargo continues to exist for activities with a U.S. nexus, including U.S. persons, USD payments, and/or goods, software, or technology subject to U.S. law – Some very limited sanctions relief for U.S. companies and their foreign subsidiaries (e.g. GL H and aviation specific licenses) • JCPOA mainly benefits non-U.S. companies who can engage in activities with no U.S. nexus • U.S. companies generally still cannot do business in or with Iran due to a broad U.S. trade embargo Hogan Lovells | 5

U.S. Sanctions on Iran

• U.S. embargo generally remains in place • Primary Sanctions (with limited exceptions): U.S. persons wherever located continue to be broadly prohibited from engaging in transactions or dealings with Iran or its government • U.S. Export Controls: All licensing requirements and prohibitions under the Iran Transactions and Sanctions Regulations (ITSR) and the U.S. Export Administration Regulations (EAR) continue to apply • Designation authorities: including support for terrorism, Iran’s human rights abuses, proliferation of weapons of mass destruction (WMD), etc. • Secondary Sanctions targeting third parties for dealings with Iranian persons/entities that remain designated on the SDN List that have been designated under terrorism, counter-proliferation, missile, and human rights authorities • State and Local Laws • SEC reporting requirements

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Trump Administration President Trump refused to certify Iran’s compliance with its obligations under the The first set of secondary sanctions will be JCPOA by the October re-imposed on August 7, 2018; 2017 deadline The remaining secondary sanctions will be But Trump continued to sign JCPOA re-imposed on November 5, 2018; waivers, including in January 2018, Certain Iranian parties will be re-designated temporarily extending suspension of as SDNs on November 5, 2018 U.S. secondary sanctions

On May 8, 2018, US primary sanctions on Iran President Trump will snap back after 90-day and announced that the 180-day wind-down periods U.S. would withdraw from the  GL H activities must be completed JCPOA and begin by November 4, 2018 re-imposing all  OFAC will revoke aviation specific sanctions that were licenses after August 6, 2018 lifted under JCPOA

Hogan Lovells | 7 U.S. Sanctions on Russia Russia – U.S. Sanctions Overview Introduced in March 2014 as targeted sanctions focused on SDNs, but have expanded since that time, four key components:

Restrictions on dealings with SDNs

•Blocking of property and interests in property, broadly defined •Numerous designations (several Russian banks, defense companies, and individuals)

Sectoral sanctions under four OFAC Directives (no blocking of property)

•Currently target banks, energy, and defense companies in Russia identified on the Sectoral Sanctions Identifications List (SSIL) – not all are subject to the same restrictions •Restrictions on certain financial dealings (e.g., new “debt” and “equity”) •Extensions of credit (including payment terms) are considered as “debt” •Restrictions on exploration or production projects in Russia (deep water, Arctic offshore, or shale)

Export controls

•Defense articles/services under the International Traffic in Arms Regulations (ITAR) •Commercial/dual use items under the U.S. Export Administration Regulations (EAR)

Crimea (broad territorial sanctions)

Hogan Lovells | 9 Sanctioned Persons

U.S. persons are prohibited from engaging in any dealings with SDNs OFAC designated a number of and must block (freeze) property entities and persons in Ukraine and interests of SDNs when such Restrictions apply to an entity Russia as SDNs under Executive property is within the possession or “owned” by SDNs at 50% or higher Orders 13660 and 13661, including control of a U.S. person, or within level (directly or indirectly) certain: the United States • Russian banks and defense • Property and interests in • Aggregate ownership counts companies property defined broadly toward the 50% rule • Individuals in Russia and • Blocking must be reported to Ukraine OFAC within 10 days

Hogan Lovells | 10 Sanctioned Persons, cont’d.

• The European Union (EU), Canada, Japan, and Australia have also imposed sanctions against certain individuals and entities, including asset freezes and visa bans • However, the lists of designated persons are not identical

Hogan Lovells | 11 U.S. Financial Restrictions

• Pursuant to EO 13662, and as supplemented by CAATSA, OFAC has imposed certain restrictions on transactions with the financial, energy, and defense sectors in Russia • OFAC published the Sectoral Sanctions Identification List (“SSIL”), which identifies entities subject to these restrictions − OFAC issued 4 Directives, which set forth groups of entities subject to different restrictions − The entities listed on the SSIL are not SDNs so they are not subject to property blocking − SSIL restrictions apply to entities owned by SSIL entities at 50 percent or greater interest, directly or indirectly − Restrictions extend to evasion, conspiracy to violate or causing a violation of these measures

Hogan Lovells | 12 U.S. Financial Restrictions, cont’d.

[Energy Sector] [Defense and Related [Financial Sector] Directive 2, as amended, prohibits Materials Sector] Directive 1, as amended, prohibits transacting in, providing financing Directive 3 prohibits transacting transacting in, providing financing for, or otherwise dealing in: in, providing financing for, or otherwise dealing in: for, or otherwise dealing in:

• new debt of longer than 14 • new debt of longer than 60 • new debt of longer than 30 days maturity (for new debt days maturity (for new debt days maturity issued after Nov. 28, 2017; issued after Nov. 28, 2017; previously it was 30 days) previously it was 90 days)

• new equity of these SSIL • Unlike Directive 1, Directive entities 2 does not place restrictions on new equity of these entities

Hogan Lovells | 13 U.S. Financial Restrictions, cont’d.

• For purposes of all three Directives, the term “debt” includes loans, guarantees, extensions of credit etc.

• For example, allowing payment terms in excess of 30 days would represent a prohibited extension of credit to a Directive 3 entity • Loans where SSILs are lenders, rather than borrowers, are not targeted by these restrictions • Analysis can be complex – OFAC issued guidance (FAQs) but not all scenarios are covered

Hogan Lovells | 14 US Financial Restrictions, cont’d.

[Deepwater, Arctic offshore, or shale projects] Directive 4 prohibits the provision, export, or • Directive 4 targets a number of energy reexport, directly or indirectly, of: companies such as: − Gazprom • goods, services (except for financial services), or technology − Gazprom Neft • in support of exploration or production for − Lukoil deepwater, Arctic offshore, or shale projects − Rosneft • that involve an SSIL entity subject to Directive 4 and have the potential to produce oil in the − Surgutneftegas Russian Federation, or in maritime area claimed by the Russian Federation, or • Not limited to goods subject to U.S. law • that are initiated on or after Jan. 29, 2018 and have the potential to produce oil in any location, and in which any SSIL subject to Directive 4 has a 33% or greater ownership interest or ownership of a majority of the voting interests

Hogan Lovells | 15 U.S. Restricted Party Lists

• Beginning April 28, 2014, the Commerce Department has added a number of Russian / Ukrainian persons to the Entity List due to the ongoing strife in Ukraine, including, but not limited to: − Uralvagonzavod − Kalashnikov Concern − Volga Group − United Shipbuilding Corporation • The Entity List includes other Russian persons designated for unrelated reasons • The U.S. government maintains other lists of restricted parties, some of which include Russian persons and

entities Hogan Lovells | 16

Export Licensing

Department of Commerce (DOC): Export Administration Regulations (EAR) – four types of Russia-related restrictions: 1. Items on the Commerce Control List controlled for National Security (NS) reasons • No longer favorable licensing policy, irrespective of end use 2. Oil/gas projects (deep water, Arctic offshore, or shale) • Eight ECCNs targeted (including oil/gas exploration data, hydraulic fracturing design and analysis data)

• Covered items by Schedule B number (EAR99 items) • Policy of denial for extraction from shale (though not through shale) 3. Entity List designations • Oil/gas companies – all items subject to the EAR but only if used for targeted projects

• Others – all items subject to the EAR, irrespective of end use 4. Expansion of the “China rule” to Russia • Several ECCNs (including 7A994 navigation systems and 9A991 aircraft etc.) are subject to licensing if intended for “military end use” or “military end user” (including those whose actions support “military end uses”) Hogan Lovells | 17

Crimea Sanctions – On 19 Dec. 2014, Executive Order 13685 imposed comprehensive sanctions on the Crimea region, prohibiting U.S. persons from:

– New investment

– The exportation, sale or provision, directly or indirectly, of any goods, services, or technology

– The importation into the U.S., directly or indirectly, of any goods, services, or technology

– Any approval, financing, facilitation, or guarantee of a transaction by a foreign person if such transaction would be prohibited for a U.S. person to undertake

– BIS amended the EAR to implement ban on export/re-export of items subject to U.S. law (even by non-U.S. persons)

– Effectively, Crimea is now subject to very broad sanctions that are territorial in nature

Hogan Lovells | 18 Countering America’s Adversaries Through Sanctions Act (“CAATSA”)

• Became law in August 2017 (passed with a veto-proof majority) • CAATSA includes the following provisions expanding primary sanctions: – Tightens restrictions under SSIL Directives 1 and 2 by reducing the length of the maturity date for debt transactions to 14 and 60 from 30 and 90 days, respectively – Authorizes imposition of (yet to be defined) sectoral sanctions on state-owned railways – Expands Directive 4 beyond unconventional exploration/production projects in Russia to the same projects anywhere in the world so long as the SSIL entity has at least a 33% interest in such project (individually or in the aggregate) • CAATSA adds new secondary sanctions that target parties engaged in the following activities: – Energy export pipelines in Russia (investment or provision of goods/services over certain monetary thresholds) – Foreign financial institutions facilitating defense- and energy-related transactions on behalf of Russian Government or transactions with SDNs – “Significant transaction” with a designated party in Russian intelligence and defense sectors (State Dept. issued the so-called “section 231” list with such parties) – Significant investment in unconventional exploration/production projects in Russia – Facilitating privatization of state assets that unjustly benefits Russian govt. officials – Cybersecurity activities – “Significant transaction” with a sanctioned party in Russia (OFAC issued helpful guidance regarding the scope of section 228 restrictions) Hogan Lovells | 19 “Kremlin” List

• Report on Senior Foreign Political Figures and Oligarchs in the Russian Federation (“Kremlin List”) • CAATSA Section 241 required the Administration to provide a report to Congress on senior Russian officials, oligarchs, and parastatal entities by January 29, 2018 – Section 241 did not require sanctioning or blocking the named individuals and entities • The Trump Administration submitted the report to Congress but did not immediately impose sanctions – The Kremlin List has no legal effect (does not impose sanctions), however the named individuals may be at a higher risk of being sanctioned Hogan Lovells | 20 Russia Sanctions – Recent Developments • On June 20, 2017, OFAC designated 38 individuals and entities as SDNs and added 20 new SSILs under Ukraine-related authorities • On April 6, 2018, OFAC designated multiple Russian targets as SDNs – 7 “oligarchs” (and their companies) and 17 top Russian government officials – Including: EN+, GAZ Group, Basic Element, Renova Group, Rosoboroneksport – Secondary Sanctions apply • General License 12C (“GL12C”) – Effective until June 5, 2018 – Authorizes most transactions and activities ordinarily incident and necessary to the maintenance of wind down operations, contracts, or other agreements with listed companies – Does not authorize the export of goods from the U.S. or divestment of debt, equity, or other holdings for an SDN – Does not authorize payments owed to these SDNs

Hogan Lovells | 21 Russia Sanctions – Recent Developments

• General License 13A (“GL13A”) – Expires June 6, 2018 – Authorized activities necessary to divest or transfer debt, equity, or other holdings as well as facilitation of transfers in such holdings from a non-US person to another non-US person – Applies to – En+ Group, GAZ Group, and RUSAL, as well as entities they own 50% or more provided that holdings were issued by Irkutskenergo, GAZ Auto Plant, or Rusal Capital Designated Activity Company • General License 14 (“GL14”) – Only for RUSAL, extends wind-down to Oct. 23, 2018 and does allow payments • General License 15 (“GL15”) – Allows GAZ Group or any other entity in which GAZ Group owns, directly or indirectly, a 50 percent or greater interest, to continue maintenance or wind down activities until Oct. 23, 2018 • Reporting obligations exist under GL 12C, GL 13A, GL 14, and GL15 Hogan Lovells | 22 EU Sanctions on Iran Iran: EU Overview

Two different sets of EU Iran sanctions legislation Applicable restrictions Lifted measures

• Nuclear-related sanctions, economic and • Restrictions on dual-use / • Import of crude oil, petroleum financial restrictive technology that can products, gas and petrochemical measures contribute to uranium products from Iran • Human rights violations enrichment, listed on • Exports to Iran of key equipment related sanctions, Nuclear Suppliers Group for the oil, gas and petrochemical measures prohibiting list or under the Missile sectors trade in equipment Technology Control • Investment in the oil, gas and Regime which might be used for petrochemical sectors internal repression and freezing funds of those • Associated services for each of the persons or entities above linked to human rights • Shipping and shipbuilding violations restrictions removed • Storing or transporting oil and petrochemical products

Hogan Lovells | 24 Iran: EU asset-freezing measures

• Persons and entities still subject to asset freezing measures: – Nuclear-related sanctions: 62 individuals and 184 entities – Human rights-related sanctions: 87 individuals and 1 entity • Key targets: – Government of Iran – Iranian Revolutionary Guards Corps and subsidiaries • EU asset-freezing measures target entities owned or controlled more than 50% by a sanctioned entity

Hogan Lovells | 25 The EU's reaction

• 18 May 2018: Commission presents plan to counter U.S. sanctions: – Activation of the Blocking Statute – Removal of obstacles for the European Investment Bank to invest in Iran

– Explore the possibility of one-off bank transfers to the Central Bank of Iran “As long as Iran continues to implement its nuclear • 25 May 2018: meeting of the Joint Commission related commitments, as it including the EU, China, France, Germany, is doing so far, the Russia, United Kingdom and Iran European Union will remain committed to the – Participants recalled their commitment to the continued continued full and effective implementation of the JCPOA implementation of the nuclear deal" • Total and Maersk announced their intention to High Representative abandon business in Iran Federica Mogherini 8 May 2018 Hogan Lovells | 26 Regulation 2271/96: the blocking regulation

• Protects EU companies from the extraterritorial reach of certain U.S. sanctions

• Applies to the sanctions listed in the Annex Sanctions currently in the Annex • Prohibits compliance, active or by negligence, with the • National Defense Authorization requirements or prohibitions of extraterritorial Act for Fiscal Year 1993 • Cuban Liberty and Democratic sanctions Solidarity Act of 1996 • Prohibits the recognition of judgements or • Iran and Libya Sanctions Act of 1996 administrative decisions implementing extraterritorial • 31 CFR (Code of Federal sanctions Regulations) Ch. V (7-1-95 edition) Part 515 — Cuban Assets • Requirement to inform the Commission if economic Control Regulations, subpart B and/or financial interests are affected by the (Prohibitions), E (Licenses, Authorizations and Statements extraterritorial sanctions of Licensing Policy) and G • Possibility to recover damages caused by the application (Penalties) of extraterritorial sanctions • EU preparing amendment of the Annex by 4 June 2018

Hogan Lovells | 27 Impact on EU companies

• European leaders want to minimise the impact on EU companies but do not want an open confrontation with the U.S. • Blocking Regulation probably not sufficient to protect all companies • Compliance might become particularly challenging to EU subsidiaries of U.S. corporates • Compliance clauses relating to U.S. sanctions in contracts can raise concerns for EU corporates • It is unclear whether Iran will continue respecting the terms of the JCPOA

Hogan Lovells | 28 Iran: Practical considerations under U.S. Sanctions

• After 16 January 2016, Iran-related activities with U.S. nexus still restricted, e.g., payments in U.S. dollars, transactions involving goods, software or technology (“items”) subject to U.S. law, and transactions otherwise involving U.S. persons • Unwillingness of non-U.S. banks to support Iran trade or process Iran-related payments • Loss of visa-free travel to the U.S. by nationals of Visa Waiver countries who travel to Iran • Mandatory disclosure obligation to U.S. Securities and Exchange Commission continues • Restrictive covenants/representations imposed by banks in lending/financing agreements • No “grandfathering” of activities in case sanctions “snap back” into effect

Hogan Lovells | 29 EU Sanctions on Russia EU Russia Sanctions – Trade restrictions – Sectoral

Ban on sale, supply, transfer or export, directly or indirectly, of listed oil exploration or Ban on provision of technical assistance, production goods and technology for use in brokering services, financing or financial Russia, and destined for projects in: Arctic, Deep- assistance (including payment services and letters water projects, Shale projects of credit) in relation to prohibited goods

Financial assistance does not include simply processing payments or transfers of funds, but acts Prohibition on in relation to: of financing which provide substantive support to provision of services drilling, logging and completion services, well transactions involving prohibited goods (PJSC testing, specialized floating vessels Rosneft Oil Company v HM Treasury and Ors, C- 72/15)

Hogan Lovells | 31 EU Russia Sanctions – financial restrictions (1)

Entities subject to financial restrictions Prohibitions on Restrictions apply to

• 5 Banks: • The sale or purchase of or dealing with transferable securities and • Transferable securities Sberbank, money-market instruments with a and money market VTB Bank, maturity of over 30 days if issued instruments issued after Gazprombank, after 12 September 2014 (related 12 September 2014 or VEB, investment services and assistance loans made after this date, Rosselkhozbank; with such issues is also prohibited); in all cases where the and maturity is over 30 days • 6 Companies: OPK Oboronprom, • Making or being part of any arrangement to extend new loans or United Aircraft credit with a maturity exceeding 30 Corporation, days after 12 September 2014 Uralvagonzavod, Rosneft, Transneft Gazprom Neft

Hogan Lovells | 32 EU Russia Sanctions – financial restrictions (2)

Transferable Money-market Rollovers of Deposit services securities instruments existing debt

Shares in companies and other Classes of They must comply Not covered unless securities equivalent to shares instruments which with the 30-day used to circumvent in companies, partnerships or are normally dealt maturity limit the prohibition on other entities, and depositary in on the money new loans receipts in respect of shares market, such as treasury bills, Bonds or other forms of certificates of securitised debt, including deposit and depositary receipts in respect commercial papers of such securities, and excluding Any other securities giving the instruments of right to acquire or sell any such payment transferable securities Hogan Lovells | 33 EU Russia financial restrictions in practice

• Current accounts with the 5 listed banks can be used, assuming that they are not used for circumvention – Eg. agreeing to leave large amounts of capital untouched in a current account by way of a long-term deposit is permissible. • Payment terms and delayed payment for goods are not prohibited if they do not suggest circumvention – Eg. payment terms granted to the 6 listed entities in line with normal business practice are permissible, unless the extension may suggest circumvention. • Financing related to exports or imports in relation to non- restricted trade between the EU and Russia is carved out of the restrictions on making loans to the designated entities.

Hogan Lovells | 34 EU Russia/Ukraine Sanctions – asset-freezing measures

• The EU has imposed asset-freezing measures in relation to Russia and Ukraine against 61 entities and 286 persons • Asset-freezing measures cover listed parties or entities owned or controlled, directly or indirectly, more than 50% by a listed party • The measures prohibit: – Dealing with funds or economic resources belonging to, owned, held or controlled by the designated persons – Making funds or economic resources available, directly or indirectly, to or for the benefit of the designated persons – "Economic resources": Assets of every kind (tangible or intangible, movable or immovable), which are not funds but may be used to obtain funds, goods or services. Essentially, any asset of any kind is likely to fall within the definition of “funds” or the definition of “economic resources” – Dealing with “economic resources” means exchanging them, or using them in exchange, for funds, goods or services – Participating, knowingly and intentionally, in activities the object or effect of which is to circumvent the above prohibitions • Activities are prohibited include, e.g., – Issuing a letter of credit where a designated person is the beneficiary – Supplying goods or services to a designated person – Re-structuring a transaction to try and avoid the impact of sanctions

Hogan Lovells | 35 Questions?

Beth Peters Andrew Keller Partner, Washington D.C. Partner, Washington D.C. [email protected] [email protected]

Lourdes Catrain Aline Doussin Partner, Brussels Partner, London [email protected] [email protected]

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